Tuesday November 24, 2009

Q+A - Indonesia's president faces mounting criticism

JAKARTA (Reuters) - Indonesia's President Susilo Bambang Yudhoyono faces mounting criticism over a graft scandal involving the main law enforcement agencies and the government's bailout of a small lender, Bank Century, last year.

An alleged plot by police and state prosecutors to frame two anti-corruption agency officials has sparked a public outcry. On Monday, Yudhoyono urged the police and attorney-general's office to drop the case, but did not say whether he would follow any of the other recommendations made by an independent team of experts.

Anti-corruption activists watch watch a live television broadcast of a speech by Indonesian President Susilo Bambang Yudhoyono in Jakarta November 23, 2009. (REUTERS/Crack Palinggi)

The same day, the Supreme Audit Agency criticised the central bank's handling of the Bank Century bailout, saying it had caused losses for the state. Finance Minister Sri Mulyani Indrawati and Vice President Boediono, a former central bank governor, had both supported the bailout and could face further investigation.

Here are some questions and answers about how these two issues could affect Yudhoyono's presidency:

WILL EITHER ISSUE HURT PROSPECTS FOR REFORM?

Neither case is likely to impede policy implementation at this stage or stop Yudhoyono from addressing infrastructure or reforms of the civil service, police, and courts. His response does suggest the pace of reform will be painfully slow. However, if either case snowballs, it could distract key policymakers and reformers, including Indrawati and Boediono.

In the Bank Century case, the risk is that the reputations of Boediono and Indrawati, and even of the president himself if he is implicated, could suffer. All three have defended the bailout as essential for maintaining confidence in the financial system during last year's global credit crisis.

Yudhoyono's handling of the graft case has disappointed investors. He risks squandering the political capital from his landslide re-election victory in July for failing to act boldly against entrenched interests and corrupt senior officials.

The main hope is that Kuntoro Mangkusubroto -- a respected technocrat who was put in charge of a special presidential office or "West Wing" and who Yudhoyono appointed to co-ordinate legal reform -- will push hard to ensure that legal reforms are made.

WILL THESE CASES DETER INVESTORS?

Not for now. Investors are likely to regard the Bank Century case as background noise for the moment, while the graft scandal served to confirm that Yudhoyono, who prefers consensus, shies away from bold, sweeping change.

Investor interest in Southeast Asia's biggest economy hasw picked up to such an extent that the central bank is already worried about "hot money" inflows.

Stocks are up 80 percent this year, bond yields have tumbled on foreign buying, and the rupiah is up 16 percent against the dollar, making it Asia's best-performing currency.

Investors who were too optimistic about Yudhoyono's appetite for dramatic change will have to adjust their expectations, said ING economist Tim Condon: "Markets have overshot. It's not that he has feet of clay, but he's not Superman either. He can't just wave a wand and fix all Indonesia's problems."

WHY DOES BANK CENTURY CASE MATTER?

The Supreme Audit Agency this week criticised the central bank's handling of Bank Century's $700 million bailout, saying it did not provide correct and complete information.

The central bank said it provided complete information.

Parliament could now demand further investigation of the matter, and call both Boediono and Indrawati for questioning.

Some analysts said the audit agency's criticisms are politically motivated. The chief auditor at the agency is a former tax official who left when Indrawati overhauled and cleaned up the notoriously corrupt tax department.

A censure motion in parliament over the issue would be seen by many Indonesians as a publicity stunt, but it could still damage public perceptions of Indrawati and Boediono, who both have reputations for clean governance and strong reform credentials. Neither is likely to resign based on evidence presented so far.

Yudhoyono has tried to squash rumours that Bank Century was bailed out in order to protect the deposits of wealthy donors to his election campaign. Indonesia's campaign financing rules are fairly opaque.

If it turns out that Yudhoyono did receive donations from Bank Century's wealthy depositors then there could even be a call for his impeachment, but again, analysts said this is unlikely because it would be seen as a terrible blow for the country.

WHAT NEXT FOR ATTORNEY GENERAL AND POLICE?

The attorney-general and head of the national police show no sign of planning to resign, and a senior police official who was implicated in the scandal was only temporarily suspended. Some media reported he is privvy to details of wealth accumulated by the top police and military.

Analysts think it's more likely Yudhoyono will wait a while and perhaps shuffle the top jobs once the scandal has blown over.

The Corruption Eradication Commission (KPK), which with the corruption court has proved most effective in fighting graft, has become more popular with the public as a result of the scandal.

It may still come under threat from the political and business elite. While the KPK is likely to retain its credibility and power, the corruption court's powers have been reduced so sentences for corruption cases may be lighter in future.

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